The Maturing of Corporate Social Responsibility

The Maturing of Corporate Social Responsibility

By Carl M. Cannon - June 20, 2011

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This past weekend, an art gallery at Rutgers University opened a photographic exhibit called "A View of Caring," which documents the efforts of 73 people around the world who are working to make life better for others. To be precise, the exhibit, which is being underwritten by Johnson & Johnson, shines a light on the company's efforts to improve the health of women and children in impoverished corners of the Earth.

It makes obvious business sense for a pharmaceutical giant to be engaged in global health issues, but this goes further. The documentary photographers themselves were subsidized by Johnson & Johnson as part of the company's International Center of Photography Fellowship Program. In addition, the community-based anti-poverty efforts in the exhibit were also underwritten by Johnson & Johnson.

To the editors of Art Daily, this endeavor constitutes a "model corporate social responsibility effort." To executives of Johnson & Johnson, it's the kind of thing they have done since the 1940s, when their former chairman formulated a company credo vowing to value the well-being of the company's customers.

"This was long before anyone ever heard the term ‘corporate social responsibility,' " Johnson & Johnson proudly proclaims. "Our credo is more than just a moral compass. We believe it's a recipe for business success."

But is it?

Corporate social responsibility emerged in the conceptual frontiers of capitalism in the late 1960s. It was an enticing idea -- harnessing the economic might of corporations to benefit society as a whole -- if ephemeral in its implications. Over time, however, courtesy of the World Business Council for Sustainable Development, a working definition emerged to describe the doctrine: "Corporate social responsibility is the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large."

We're accustomed to this kind of talk today, but four decades ago "corporate social responsibility" generated an immediate pushback. "Only people can have responsibilities," wrote Milton Friedman in a blistering 1970 rebuttal. "Business as a whole cannot be said to have responsibilities, even in this vague sense."

The great free-market economist continued: "What does it mean to say that the corpo¬rate executive has a ‘social responsibility' in his capacity as businessman? If this statement is not pure rhetoric, it must mean that he is to act in some way that is not in the interest of his employers."

To the critics, any notion that an executive would expend company resources addressing problems such as pollution abatement or hiring members of the underclass for the social objective of reducing poverty violated a corporate officer's fiduciary responsibility. And while Friedman acknowledged that a businessperson was free to pursue such goals on his own time -- the classic definition of philanthropy -- he had no right to commit the resources of his employers, company stockholders, to such causes. "In each of these cases, the corporate exec¬utive would be spending someone else's money for a general social interest," Friedman wrote.

This was not the last word on this subject. Milton Friedman's points were well-taken, but various lines of argumentation were offered by way of a response. And ultimately, a competing ethos evolved. If the old corporate model was "maximize profits," the one that supplanted it was often described in the form of a basic question. "Is our business model sustainable?"

"Bad" Business?

Nothing is guaranteed to last forever, but the inexpedience of eating your seed corn has been known to mankind since before capitalism existed. Theodore Roosevelt, the first nation's first conservationist president, stated it plainly in his 1907 State of the Union address:

"There must be a realization of the fact that to waste, to destroy, our natural resources, to skin and exhaust the land instead of using it so as to increase its usefulness, will result in undermining in the days of our children the very prosperity which we ought by right to hand down to them amplified and developed."

The great "trust-buster" harbored few illusions that business would be as progressive-looking as his administration. Roosevelt was explaining why he sought to expand government's role in the economy -- and in corporate oversight. But it was not an accident that the president stressed the cause of conservation in making this point, just as it is no coincidence that the earliest efforts at CSR were directed at natural resource management and the environment.

There was a basic logic at work here: A lumber company that clear-cuts all the timber on its land can prosper only as long as it has access to ever-more virgin forests. Management theorist Peter Drucker, paying homage to this certainty -- and also to Milton Friedman's unsentimental analysis of CSR -- wrote that "the first responsibility of business is to make enough profit to cover the costs for the future."

"If this social responsibility is not met, no other social responsibility can be met," Drucker added. Sustainability, he added, was a necessary objective "not because the manager has a responsibility to society [but] because the manager has a responsibility to the enterprise."

The famed business guru was addressing an expansive new rational for CSR known as the "stakeholder theory," which had been embraced by corporate critics such as Ralph Nader. Yes, a corporation had a primary duty to its investors, according to this doctrine, as well as to its employees, suppliers and customers. But what about other entities and individuals who had a stake in the company's activities?

Should potential employees be considered? What about future potential customers? Proponents of the stakeholder theory would add to that list: governmental institutions, trade unions, other corporations in the same field, local communities and even the public at large. Again, the critics said this was going too far. And though he praised Nader by name for pressuring government to set standards for product quality and safety, Drucker insisted that management "must resist responsibility for a social problem that would compromise or impair the performance capacity of its business."

But what if it could be shown that CSR didn't hinder the performance of a company in its core business -- and might even increase profits? What if corporate social responsibility could be shown to be good for business?

In 1990 and 1991, a Swiss industrialist named Stephan Schmidheiny traveled the world gathering like-minded CEOs to an effort he named the Business Council for Sustainable Development. In 1992, this group produced a book titled "Changing Course: A Global Business Perspective on Development and the Environment."

"The last few decades have witnessed an accelerating consumption of natural resources -- consumptions that is often inefficient and ill-planned," that book proclaims. "Resources that biologists call renewable are not being given time to renew. The bottom line is that the human species is living more off the planet's capital and less off its interest. This is bad business."

Greed Is (Not) Good

In 1986, flamboyant corporate raider Ivan Boesky delivered an iconic commencement address at the University of California business school. Boesky was big medicine among the budding capitalists in their caps and gowns, and when he came to his money quote -- "Greed is all right!" -- the students went nuts. (Although altered to "Greed is good" in the movie "Wall Street" by the Boesky-inspired Gordon Gekko character -- played by Michael Douglas -- greed became the signature sentiment of the 1980s.)

But there was a reckoning. Boesky and his confederates went to prison, the bubble burst and Wall Street became become synonymous not just with greed but incompetence. Today UC-Berkeley's graduate school boasts a Center for Responsible Business, where students are familiarized with the "double bottom line," a measure of a corporation's social impact as well as its profit-and-loss statement, along with the "triple" bottom line: "people, planet, profit."

The center, established in 2004, was the brainchild of former California congressman Tom Campbell when he was dean of Cal's Haas School of Business.

"I believe that the students in business school today have a very strong sense of social, as well as financial value," Campbell said in an interview with RCP. "The concept of the ‘double bottom line' . . . is very well known by business students; that all you do is make a financial gain for yourself would not satisfy any of the students at the Haas School Of Business when I was dean -- or today."

Former Campbell colleague David Vogel, a professor of political science and business at UC-Berkeley, has emerged as the preeminent national expert on CSR. In his book "The Market for Virtue," Vogel concluded that Friedman was right -- a corporation's primary responsibility is to its shareholders -- but that there are times when CSR is the right course for a company.

"Yes, there are certainly cases when CSR pays -- either directly by marketing ‘responsible products' or lowering environmental costs," Vogel said in an interview, "and indirectly by improving employee morale and maintaining a firm's reputation and protecting its brand."

As to the notion that CSR is a panacea, Vogel is quite skeptical. "The belief that corporate responsibility ‘pays' is a seductive one," he wrote in Forbes magazine. "Who would not want to live in a world in which corporate virtue is rewarded and corporate irresponsibility punished? Unfortunately, the evidence for these rewards and punishment is rather weak. There is a 'market for virtue,' but it is a very limited one."

But Professor Vogel says something else, too: "Managers are not absolved of their moral obligation as human beings once they become managers."

And that, really, is the heart of CSR.

Doing It Right

In his videotaped interview with RCP, Tom Campbell asserted that one of his happiest moments in life was when he was volunteering as a teacher in Africa.

"That cannot be divorced from the question of corporate social responsibility," he said. "I'm not any different from anyone else. There is a part of me that responds to that even though there's no financial gain, indeed it's financial loss. That aspect of what makes one feel right as a person should not be drummed out of one by the study of economics, or the study of business, or the study of law."

Billy Shore, who left politics after working on Gary Hart's 1984 presidential campaign to start a Washington-based, anti-hunger organization called Share Our Strength, has gotten this same response time and again. Shore approaches CSR from the other end of the coin: He persuades business to help his philanthropy. But he's noticed something along the way.

"Our experience has been that many companies recognize the need to be socially responsible corporate citizens and look to see if they can craft their philanthropic or community initiatives in ways that also help meet business objectives," he told RCP. "But because people are people, and we all want to be engaged in something that is meaningful and larger than ourselves, we have seen one case after another of a corporate leader getting personally committed and staying personally committed to the issue, which in our case is hunger."

This begs a question -- one raised, incidentally, by Milton Friedman -- concerning the concept of sticking with your core competency. In his book on CSR, Vogel notes approvingly that Nike monitors working conditions at its overseas plants, Starbucks insists on selling coffee with a "Fair Trade" label, Timberland gives employees a week off with pay to volunteer at a charity, and that British Petroleum worked to reduce greenhouse gas emissions in its drilling and refining operations. All that gives rise to a stark question: Given what happened in the Gulf of Mexico last year, wouldn't it be better for BP to spend that money drilling for oil safely?

Dirk Olin, Editor-in-Chief of Corporate Responsibility Magazine, which rates CSR each year, believes that they key issue is transparency. The magazine evaluates how companies practice CSR in seven silos: environment, climate change, governance, employee relations, human rights, philanthropy, and the financial health of the company.

"Today, the smart CR managers get the ear of the CFO to demonstrate that increasing profits is one thing, but sustaining profits is another," Olin said. "Peter Drucker's construct -- ‘what gets measured, gets managed' -- is true, as far as it goes. The question is: Are you measuring the right stuff?"

In other words, Friedman may have had it backwards. Yes, individuals -- and not businesses -- have responsibilities. But businesses are run by people.


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Carl M. Cannon is the Washington Bureau Chief for RealClearPolitics. Reach him on Twitter @CarlCannon.

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